HARCO NATL. INS. CO. v. MILLENIUM INS. UNDERWRITING LIMITED

United States District Court, N.D. Illinois, Eastern Division

August 3, 2005.

HARCO NATIONAL INSURANCE COMPANY, Petitioner,
v.
MILLENIUM INSURANCE UNDERWRITING LIMITED (on its own behalf and on behalf of all other members and/or capital providers of LLOYDS SYNDICATE 1245 for the 2004 Year of Account), Respondent.

The opinion of the court was delivered by: JAMES MORAN, Senior District Judge

MEMORANDUM OPINION AND ORDER

Harco National Insurance Company (Harco) petitions the court to
compel arbitration between Harco and Millenium Insurance
Underwriting Limited (Millenium) to resolve a dispute regarding
the reinsurance of a bail bonds liability. Millenium contends
that the parties never executed the proposed contract for
reinsurance and therefore did not agree to arbitrate. Based on
the undisputed facts, we find that Harco and Millenium did agree
to arbitrate and grant Harco's petition.

BACKGROUND

Harco is an insurance company incorporated and headquartered in
Illinois. Millenium, a British corporation headquartered in
London, England, is a member of Syndicate 1245 (Syndicate), an
underwriting syndicate at Lloyds of London. In 2004, Harco acted
as a surety for bail bonds issued by Capital Bonding Company
(CBC). Prior to assuming this liability, Harco, through its
broker Christopher Rich, contacted the Syndicate to inquire about reinsurance for the 2004 bail bonds. Rich spoke with Justin
Tweedie, an employee of Heritage Managing Agency Limited, which
managed various Lloyd's underwriting syndicates, including
Syndicate 1245. Tweedie was the Syndicate's main underwriter.

Tweedie and the Syndicate had prior experience with CBC. In
2001 and 2002, the Syndicate had provided reinsurance on CBC bail
bonds to a carrier other than Harco. In 2002, the Syndicate had
to pay this carrier over two million dollars to remedy CBC's cash
flow problems. Despite CBC's promises, the money had not yet been
repaid. Given this history, Tweedie sought assurances that CBC
would repay its debt and that similar problems would not arise in
the event the Syndicate once again provided reinsurance for CBC
bail bonds. At a meeting on January 5, 2004, Tweedie told Rich
that the Syndicate would underwrite 7.5 per cent of the
reinsurance if certain issues were resolved. Tweedie requested
that CBC explain why the cash flow problems that occurred in
2002, resulting in the Syndicate's payout, would not recur in
2004; that it provide a repayment schedule for the money owed;
and that it clarify its request for a letter of credit covering
possible losses.

Responding to these concerns, Vincent Smith, the president of
CBC, sent Rich an e-mail, which was forwarded to Tweedie. In his
e-mail, Smith stated that the previous cash flow problems were
largely the result of defamatory statements made about CBC by its
competitors, and that subsequently CBC filed a federal court
action against those competitors. Smith also informed Rich that
Harco would be exercising more control over CBC's revenue and
that the reinsurers would be repaid out of the funds turned over
to Harco on a monthly basis. As to the letter of credit, Smith
clarified that he needed a letter for one year to secure a line
of credit with a local bank. He stated that he would provide a
corporate and personal guarantee that the credit would not be
drawn down. After further discussion with Rich and an e-mail from him elaborating on Harco's control over CBC, Tweedie indicated
that the Syndicate would be willing to underwrite 7.5 per cent of
the reinsurance for the bail bonds.

On February 19, 2004, Tweedie affixed the Syndicate's stamp on
the placement slip for the bond reinsurance. The slip identifies
the type of contract as a "Bond Quota Share Reinsurance
Agreement," and sets the reinsurance percentage at 7.5 per cent.
Under the heading "General Conditions," the placement slip lists
"Arbitration Clause" and "Governing Law Clause (Illinois),"
without further elaboration.*fn1 Tweedie made several
additional annotations on the placement slip in pencil, two of
which are relevant to our inquiry. He drew a line through the
Syndicate's stamped number and also wrote "Sub indemnification
letter length." In his affidavit, Tweedie states that his
intention in making these marks was to condition the execution of
the placement slip on two "subjectivities": letters of
indemnification from CBC and Smith, and a written confirmation of
the length of the bonds issued by CBC. He states that under
common practice in London, the Syndicate was not bound by the
placement slip until the insurer removed the pencil line from its
stamp.

On February 25, 2004, Rich sent Tweedie an e-mail, with an
attached message from Smith, concerning the two express
conditions. Smith's e-mail stated that the average length of the
bonds was six months, and that the corporate and personal
guarantee documents were being prepared that day and would be
sent out for distribution that night. Rich wrote to Tweedie, "I
would like to get this wrapped up this week and would appreciate
your advice as to whether I can now get your qualifications
removed from your line and cover note?" Tweedie responded, "I am happy to remove our qualifications," and
informed Rich that he would be at the Syndicate's underwriting
box that afternoon. In his affidavit, Rich states that the same
day he went to the Syndicate's underwriting box to watch Tweedie
erase the line through the Syndicate's number and his two
qualifications from the placement slip. He further contends that
Tweedie wrote on the slip that a copy of the indemnifications
would be provided by March 1, 2004. Tweedie states that he does
not recall erasing his conditions or the line through the
Syndicate's number. Harco does not dispute that the Syndicate
never received the guarantees. Harco claims that it sent the
Syndicate its share of the premiums pursuant to its reinsurance
agreement, but that the Syndicate did not pay for its share of
the liabilities. The Syndicate denies that it was ever bound by
the placement slip and that it received premium payments.

On January 19, 2005, the Syndicate filed an action against
Harco in the Queen's Bench Division of the High Court in London,
England, seeking a declaration that it was never bound to
reinsure, or that it has validly avoided reinsurance of the CBC
bonds. On April 22, 2005, Harco sent a letter to the Syndicate
requesting that it submit its dispute for arbitration in Rolling
Meadows, Illinois, and simultaneously filed this action to compel
arbitration against Millenium, on its own behalf and on behalf of
all the members of the Syndicate for 2004.

DISCUSSION

Harco asserts that the court has both diversity jurisdiction
and jurisdiction pursuant to 9 U.S.C. § 203, which grants federal
district courts original jurisdiction over proceedings that
involve arbitration agreements that fall under the Convention on
Recognition and Enforcement of Foreign Arbitral Awards. Millenium
contests that the court has jurisdiction under § 203 because it
denies that the parties ever agreed to arbitrate. Nonetheless,
Millenium does not dispute that the court has diversity
jurisdiction pursuant to 28 U.S.C. § 1332. Under the Federal Arbitration Act "[a] party aggrieved by the
alleged failure, neglect, or refusal of another to arbitrate
under a written agreement for arbitration may petition any United
States district court . . . for an order directing that such
arbitration proceed in the manner provided for in such
agreement." 9 U.S.C. § 4. Where the execution of an arbitration
agreement and the party's failure to comply are not in question,
the court issues an order directing the parties to arbitrate in
accord with their agreement. Id. However, "[i]f the making of
the arbitration agreement or the failure, neglect, or refusal to
perform the same be in issue, the court shall proceed summarily
to the trial thereof." Id. Millenium argues that there is a
question of fact as to whether the parties ever entered into the
agreement for reinsurance, which contained the arbitration
clause, and therefore, a trial is necessary.

Millenium contends that Tweedie's pencil notations  the line
through the Syndicate's number and the phrase "Sub
indemnification letter length"  were conditions precedent to
the execution of the parties' reinsurance agreement. Millenium
asserts that under British custom the pencil line through the
Syndicate's stamped number indicated that the insurer was not
bound by the contract and Tweedie's phrase, "Sub indemnification
letter length," subjected the contract to two conditions or
subjectivities: a letter of indemnification from CBC and Mr.
Smith, and written confirmation of the length of bonds issued
under CBC's bail bond program. Harco does not contest either of
these assertions. However, it does dispute Millenium's conclusion
that since the letters of indemnification were never provided,
the conditions precedent were not met and the contract never took
effect.

Millenium would have a stronger argument if undisputed facts
did not reveal that Tweedie removed his conditions precedent and
entered into the agreement with Harco prior to receiving the
letters of indemnification. The original placement slip evidences
Tweedie's removal of the conditions precedent. In his affidavit,
Christopher Rich testifies that Tweedie erased his pencil line
and the phrase, "Sub indemnification letter length," from the
placement slip on February 25, 2004. A copy of the slip attached
to his affidavit as exhibit 3 does not contain these conditions.
Tweedie does not deny that he erased these marks. Rather, he
states in his affidavit that he does not recall erasing his
notations from the slip.

Regardless of his memory of the event, Tweedie's e-mail from
February 25, 2005, indicates a clear willingness to lift the
conditions. Rich sent Tweedie an e-mail to address his concerns
regarding indemnification and bond length. Rich attached an
e-mail from Vincent Smith, president of CBC, which stated that he
was drawing up corporate and personal guarantee forms to be
distributed to the participating reinsurers, and that the average
length of CBC's bail bonds was six months. In his e-mail, Rich
wrote, "I would like to get this wrapped up this week and would
appreciate your advice as to whether I can now get your
qualifications removed from your line and cover note?" Tweedie's
e-mail response stated, "Thanks for that. I am happy to remove
our qualifications. I am at the box this pm but am away Thursday
and Friday so if you can't get in to see me, please see Richard
Bryant." Millenium argues that Tweedie's e-mail response does not
evidence an intent to remove the qualifications right then, but
rather an intent to lift the subjectivities once he had received
the requested indemnifications. To the contrary, Tweedie's e-mail
evidences a clear intent to lift the subjectivities immediately.
Rich asked if he could now get Tweedie's qualifications
removed, to which Tweedie replied he is happy to lift them and
indicated that Rich could come over to the Syndicate's box that
day in order to remove them. Rich testifies that he did indeed go
over to the Syndicate's box that day and watch Tweedie remove his
conditions. The notation that the indemnifications would be
provided by March 1, 2004, further indicates that Tweedie did not wait for their receipt before lifting his subjectivities.
Tweedie's failure to recall this event does not create an issue
of fact in light of the slip, Rich's affidavit, and Tweedie's
e-mail correspondence with Rich.

The parties entered into an agreement that listed an
arbitration clause as a general condition and identified Illinois
law as governing. As Harco points out, the courts have held that
the phrase "arbitration clause" in a contract is sufficient to
establish the parties' agreement to arbitrate disputes, see
CNA Reinsurance Co., Ltd., 2001 WL 648948 at *6 n. 4 (citing to
two district court cases that have found this "skeletal phrase"
to create a binding agreement to arbitrate, Allianz Life
Insurance Co. v. American Phoenix Life and Reassurance Co., 2000
WL 34333013 at *3 (D.Minn. 2000) and North Carolina League of
Municipalities v. Claredon National Insurance Co.,
733 F.Supp. 1009, 1011 (E.D.N.C. 1990)). However, this phrase provides no
guidance as to the details of the arbitration, i.e., its
location and the selection of arbitrators.

The parties' reinsurance agreement states that the wording of
the agreement, including that of the arbitration clause, is "[t]o
be agreed by lead underwriter." Harco maintains that the lead
underwriter on its CBC bond liability was the Hiscox Syndicate,
with which Harco had entered into an agreement over two months
before the execution of its agreement with Syndicate 1245. The
Hiscox Syndicate is the lead underwriter, Harco argues, because
it was the first syndicate to reinsure the CBC bond program for
2004 and it accepted a larger portion of the risk than the other
insurers. Therefore, Harco contends, the more detailed
arbitration terms provided in its agreement with the Hiscox
Syndicate apply to its arbitration agreement with Syndicate 1245
because those are the terms of the lead underwriter.

Millenium disputes the contention that the term "lead
underwriter" in the placement slip refers to the Hiscox Syndicate. Millenium argues that under
accepted practice in the London reinsurance market, the term
"lead underwriter" in a placement slip refers to the first
insurance company to sign that placement slip, differentiating it
from those insurers who subsequently sign the same slip. Since
the Hiscox Syndicate entered into an agreement with Harco on
another slip, Millenium argues that it is not the lead
underwriter for purposes of Syndicate 1245's agreement with
Harco. Rather, Millenium argues that Syndicate 1245 is the lead
underwriter as the first and only reinsurer on the placement
slip.

Whether the Hiscox Syndicate or Syndicate 1245 is the lead
underwriter referred to on the placement slip is a factual
dispute that would require a hearing in order to resolve. In its
reply brief, Harco indicated that if the motion to compel
arbitration was granted, the parties might be able to agree to
the terms of arbitration. We encourage the parties to try to
negotiate those details. If they cannot come to an agreement on
the terms of arbitration, and if they maintain their conflicting
positions as to the identity of the lead underwriter, we will
hold a hearing on that issue. Of course, the hearing may make
clear that the parties never agreed to detailed terms for the
arbitration, in which case the court may fill the gaps of the
arbitration agreement pursuant to the Federal Arbitration Act.
Schulze and Burch Biscuit Co. v. Tree Top, Inc., 831 F.2d 709,
716 (7th Cir. 1987).

CONCLUSION

Harco's petition to compel arbitration is granted.

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